Q1
What is credit creation?
AThe process where banks create money through lending
BPrinting new currency notes
COnly accepting deposits
DOnly closing bank accounts
CBSEClass 7 (CBSE)Social ScienceCh 20 · Topic 2
How Banks Create Money
Banks can create money through a process called the credit creation, where deposited money is loaned out and re-deposited, expanding the mon
Core concept
When someone deposits money in a bank, the bank keeps a small portion as a reserve and lends out the rest to borrowers.
How it works
This loaned money often gets deposited into another bank account, which can then be partially loaned out again, repeating the cycle multiple times.
Why it matters
Through this process, the total amount of money circulating in the economy becomes larger than the original amount deposited, a concept called the money multiplier effect.
Key detail
This process is carefully regulated by central banks (like the Reserve Bank of India) to ensure banks maintain enough reserves and the money supply stays stable and appropriate for the economy.
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• Banks create money through credit creation.
• Banks keep a reserve and lend out the rest of deposits.
• Loaned money often gets re-deposited elsewhere.
• This can be loaned out again, repeating the cycle.
• This expands the total money in circulation.
• This is called the money multiplier effect.
• Central banks regulate this process.
• The Reserve Bank of India regulates Indian banks.